Berkshire Hathaway Versus SPY

There have been many articles comparing the performance of BRK.B (Berkshire Hathaway B) with other investments. Many such articles refer to the SPY exchange traded fund(ETF) which mirrors the value of the Standard & Poor 500 index. At times BRK.B outperforms the SPY and at other times the SPY outperforms BRK.B. Over long time horizons, BRK.B has been the better investment.

As of June 12, 2012, the six-month correlation of BRK.B was .96 with the S&P 500 (source: Bespoke Investment Group) as reported in the WSJ. 1.0 being perfectly correlated and -1 most inversely correlated.

Using some of the PerfectStorm pairs indicators, I designed a simple strategy to take advantage of this correlation and the indicators dictated which of the two securities to be long at any given time. Another use would be to be short the other security in a pure pairs play.

Red double lines on the bottom part of the chart dictates to be long the red security SPY. Green double lines to be long the green security BRK.B.

I started the exercise on December 18th 2012 and ended it on Friday November 22, 2013. I purchased the security the day after the signal at the high of the day and sold it on the day after the indicator changed direction at the low of that day. Examples of shorts were on the low for initiation and the high for the cover. The long only trade generated an absolute return of 34 %. The pair trade, long the stronger security and short the weak security, showed an absolute return of 15% over the same period.